Chancellor George Osborne said he was "profoundly concerned" by the City watchdog's bungled announcement of its insurance industry probe and ordered a "thorough" inquiry into the fiasco.

In a letter to Financial Conduct Authority (FCA) chairman John Griffith-Jones, Mr Osborne said the regulator had been damaged by last week's botched handling of information about its inquiry into 30 million financial policies sold between the 1970s and the turn of the millennium, which sent shares in insurance firms tumbling.

FCA chief executive Martin Wheatley insisted in an interview with BBC Radio 4's Today programme that he has no plans to quit, despite admitting yesterday the affair was not the regulator's "finest hour".

But Mr Osborne demanded answers over why the inquiry was first disclosed in a newspaper interview and why it took six hours after the stock market opened for the FCA to make clear that the scope of the investigation was narrower than initially reported, and was not likely to involve axing exit penalties on old contracts.

Insurance firms saw share price falls of more than 20% on Friday before the FCA issued its clarifying statement, having already been hard hit by pensions reforms announced in the Budget.

Stocks in the sector have since staged a fight-back on the London market.

Mr Osborne wrote: "I am profoundly concerned by the events of last Thursday and Friday in which a pre-briefing of information about a forthcoming FCA review appears to have caused considerable disruption in the trading of insurance shares.

" These events go to the heart of the FCA's responsibility for the integrity and good order of UK financial markets, and have been damaging both to the FCA as an institution and to the UK's reputation for regulatory stability and competence."

The FCA must "do everything possible to make good that damage", he added.

Mr Osborne appeare d to back the FCA's plan to commission an investigation into the issue, which will be conducted by an external law firm, in spite of MPs' calls for an external inquiry.

But Mr Osborne said the report must be "thorough" and "objective".

Treasury Select Committee chairman Andrew Tyrie described the FCA's announcement of market-sensitive information as an "extraordinary blunder" and has previously said it cannot be allowed to "investigate itself", adding that the person in charge of the inquiry should be vetted before starting.

In his letter, Mr Osborne said the FCA must hold itself to "at least as high standards as it would expect of a listed company" and should consider any disciplinary action against individuals in this light.

Mr Wheatley has come under intense pressure since the share price reaction on Friday, but told the Today programme he had a "big job to do" and was not planning to resign.

He said: "The question of whether it was market sensitive or not is something we will have an investigation to look into.

"What the industry has been asking for a lot from us is more transparency about the areas we think need looking into and that's what we were announcing - here's an area that needs looking into, nothing more than that."

Mr Wheatley said the six hours that passed before the FCA put out a statement to clarify its position was "how long it took" to go through the necessary processes.

The comments follow an apparent admission of mistakes over the affair at a conference in London yesterday, when he said: "Whenever markets move like they did on Friday there is always scrutiny.

"This was clearly not the FCA's finest hour but it does serve as a timely reminder to all parties involved of the care and thought that is needed when handling significant amounts of information we hold as part of going about our business."

Life and pensions firm shares pared back losses again today, with Aviva 4% higher and Prudential and Legal & General both up by 3%.

Legal & General had asked on Friday for the FCA to bring forward the publication of the inquiry's full details, originally not planned until yesterday as part of the regulator's business plan for 2014/15.

L&G warned at the time that the sector was suffering from a "disorderly market" reaction to the announcement.

The Treasury Select Committee will hold a hearing with the independent reviewer once they are appointed to lead the FCA review.

Mr Tyrie said the "reputation of the FCA is at stake", adding the committee wanted assurances the review would get "to the bottom of what has happened".

"The Treasury Committee will also want assurances that this work will be conducted wholly independently, of the FCA, the industry or anyone else. The reviewer's report should be published in full," he said.

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